Which of the following sequences correctly represents the steps in the exchange rate channel of monetary transmission during an expansionary monetary policy?
1
Central bank cuts interest rates, local currency appreciates, exports become cheaper, aggregate demand increases, gross domestic product rises
2
Central bank increases money supply, local currency appreciates, exports become expensive, aggregate demand decreases, gross domestic product falls
3
Central bank reduces money supply, local currency depreciates, exports become expensive, aggregate demand increases, gross domestic product rises
4
Central bank cuts interest rates, local currency depreciates, exports become cheaper, aggregate demand increases, gross domestic product rises